Europe’s Tech Awakening
All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.
The past two decades have witnessed the meteoric rise of the tech giants. Their impact on our lives and on stock markets has been vast. Innocuous-sounding acronyms like FAANG (representing Facebook, Amazon, Apple, Netflix and Alphabet (formerly known as Google)) and BAT (covering Baidu, Alibaba and Tencent) have come to represent hundreds of billions of dollars of value in the US and China respectively. Europe, in contrast, has been relatively barren. When it comes to digital platforms, Europe just hasn’t kept pace. It is time, however, to draw a line in the sand. The future is far brighter than the recent past. Europe’s tech awakening is well underway, and we think the vibrant tech landscape now flourishing across the continent foreshadows a much richer chapter for the European investor.
Despite having built global tech giants, such as SAP and Nokia, in the not too distant past, European tech has been in the US’ shadow for the past decade. The US-Europe divide is perhaps best summed up by a single, astonishing observation: the US tech sector is now worth more than the entire European stock market.
So, what’s gone wrong? We think that there have been three principal obstacles.
First, Europe has lacked capital. Even the brightest minds with the biggest ideas need money to turn their dreams into reality, but Europe has been perennially starving its entrepreneurs. In 2016, for example, the European Commission (EC) reported that venture capitalists invested just €6.5bn in European start-ups compared with €39.4bn in the US. The European Innovation Council recently delivered a damning verdict, describing the European venture capital market as “underdeveloped by comparison at all stages: inception, development and scale-up, seed-capital, start-up, and later-stage development funding.”
Capital has been in short supply, but supportive mindsets have also been difficult to find. In other words, Europe has lacked investors who understand tech. This was perhaps best summarised by complexity economist W. Brian Arthur who has helped develop the theory of increasing returns to scale. In a podcast two years ago, he shared his view that Europeans just hadn’t grasped the importance of building big user bases to the same extent as their peers in Silicon Valley. By being far too focused on short-term profitability they missed opportunities and were overtaken by competitors who better understood that growth at any cost could lead to eventual winner-take-all economics.
“I’m always amazed and slightly appalled that people think of technology in Europe as something that’s done by very big companies and it’s pretty good technology, but they don’t get that this is a game of positioning of building the user base….it’s well understood in California, it gets less well understood on the east coast, and then not very well understood elsewhere.”Professor Brian Arthur
Finally, ambitions have tended to be quite narrow. A lack of capital and supportive investors have both played their part, but the absence of role models and Europe’s failure to build thriving tech ecosystems probably matter too. Silicon Valley’s role as the western world’s epicentre of tech innovation was established long ago, underpinned by a self-reinforcing virtuous circle as it became ‘the place to be’ for software engineers and entrepreneurs alike. Success begot success, and it became an environment well-suited to supporting big ambitions. As Daniel Ek, founder of Spotify, recently noted, Europeans are still hesitant to take big risks.
But that was yesterday. Change is afoot. Europe’s caricatured vignette – bureaucratic, slow-moving, uninventive – has been difficult to shrug, but it is becoming increasingly outdated. A widespread tech renaissance is unfolding, heralding a new frontier of exciting opportunities. Investors who remain glued to the old portrayals of Europe risk missing out on some of the big future stock market winners, not just in Europe, but in the whole world.
The foundations have been laid for European tech to flourish long term as never before. Capital is available in large quantities, increasingly coming from patient, supportive investors who understand the challenges of building tech winners. This powerful combination is fostering a wave of European entrepreneurs ready to take on the world.
First, capital. The past six years alone have witnessed more than a thirteen-fold increase in the amount of equity raised by Europe’s tech ecosystem, a colossal $40bn that dwarves the $3bn raised in 2014. There’s also been a near fourfold increase in the number of European tech unicorns (companies worth more than $1bn) and more than a fourfold increase in the number of companies valued $5bn and above. Even the European Commission has realised the need for money, setting up the European Innovation Council in 2017 with the explicit goal of making approximately €3bn of funding available to ‘the most talented innovators to help their companies scale up and expand beyond European borders’.
Europe's Transforming Tech Ecosystem
Source: GP Bullhound, Capital IQ, Mergemarket. Pitchbook and Crunchbase. Equity funds raised refer to capital raised through primary equity offering. Cut-off date for inclusion in report 31 March 2020; valuations correct as at 14 May 2020.
Much of this new capital is being managed by investors who ‘get tech’. As well as those who have come over from Silicon Valley, there are native European venture capitalists hunting for the next big winner. This is a boon for European tech CEOs and founders looking for supportive, long-term shareholders willing to provide capital to help them build a competitive advantage. The popular paraphrase of Buffett’s 1979 letter that suggests managers get the shareholders they deserve appears to be coming true for European tech businesses, which for years have had to deal with short-term shareholders who just didn’t understand how to build.
What matters most is the transformation in ambitions. The thriving tech ecosystems in various European cities – from Paris to Berlin to Stockholm – have provided nurturing environments that allow entrepreneurs to aim high. And aiming high they are. Spotify’s Daniel Ek is taking on American giants Apple and Amazon in music streaming. He is winning the battle for subscribers with over 130 million paying subscribers, more than Apple and Amazon combined. Classifieds marketplace operator Adevinta – which runs several real estate, car and job marketplaces around Europe – is about to become the largest in the world as it digests eBay's classifieds division. Then there’s Jitse Groen, the ambitious founder of Dutch online food delivery business Takeaway.com, which recently merged with the UK’s Just Eat. He is currently in the process of trying to acquire American peer Grubhub, a deal that would crown Just Eat Takeaway as one of the biggest online food delivery businesses in the world.
“My selfish ambition with Spotify is just trying to show ... that we can create one of those super companies here in Europe.”Daniel Ek
The invigoration spurred by changes is truly momentous. In Berlin, for example, a start-up is apparently founded every twenty minutes. Even Lithuania, one of the EU’s smallest economies, recently produced its first unicorn (a second-hand marketplace called Vinted).
The index has begun to change too. The old characterisation of the European stock market – dominated by banks, energy companies and a raft of zombie companies kept alive by governments and low interest rates – is no longer tenable.
Europe's Sector Evolution
So, what are we, as investors, doing about all this?
Ten years ago, our portfolio looked very different. Our top holdings included Scandinavian banks like Svenska Handelsbanken and Jyske Bank, consumer goods purveyor Nestlé, oil major Total, and Swedish industrial Atlas Copco. We held compounders aplenty, but virtually no transformational growth companies, particularly the tech platform-type businesses that were flourishing in America. We were limited by the opportunity set available to us at the time.
The opportunity set is now much broader, and we’re in a better position to access it. Europe’s flourishing tech landscape has birthed a flurry of successful companies that have come to market and now boast market capitalisations in the tens of billions. These include Zalando, Takeaway.com, Delivery Hero, and Spotify, but there are plenty of others. Corporate activity has presented further opportunities. Adevinta, for example, was spun out of Norwegian media business Schibsted last year. Then later in the year South African media conglomerate Naspers spun out its international internet businesses in the form of Amsterdam-based Prosus. Naspers – via Prosus - owns about a third of Chinese gaming and social media business Tencent, having invested $32m back in 2001. That stake is now worth over $190bn.
Our portfolio today reflects this richer opportunity set. The proportion of our portfolio invested in tech businesses has risen fivefold over the past five years, and spans online food delivery, classifieds marketplaces and more.
Portfolio Digital Platform Exposure
Source: Baillie Gifford & Co. Based on a representative European portfolio.
Most of these businesses are built upon the same sort of network effects that propelled Amazon to dominance in ecommerce. The basic idea is that something becomes more valuable as more people use it. In Amazon’s case, its growth in sellers meant more choice, which encouraged more buyers to use the platform, which in turn encourages more sellers to sign up and so forth. The presence of these positive feedback loops helps tech companies scale quickly – many of the big tech winners have benefited from them. With Europe finally understanding how to harness their power, the chances of producing some of our own global champions have surely risen.
Progress is difficult to see in public markets. Companies are staying private for longer, partly because they need less capital in aggregate than they used to, and partly because the short-termism and hostility of today’s public markets incentivise them to remain behind the curtain where they’re better able to influence their shareholder registers. For that reason, hugging the index is an even more flawed strategy than usual.
We think we’re well-placed to find many more of these opportunities. Our long-term mindset is well-aligned with early-stage companies whose founders need patient capital to build tomorrow’s big winners. We’re also fortunate that Baillie Gifford has built a strong capability and good reputation for investing in private companies, which positions us well when these companies do decide to list. So we are sure that the team will be having a great many more conversations with private companies, gaining insights that benefit all our clients.
To say that we’re optimistic about Europe’s future would be an understatement. This is Europe’s moment, and we’ve never been more excited.
The views expressed in this article are those of Chris Davies and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in October 2020 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
Potential for Profit and Loss
All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.
Any stock examples and images used in this article are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.
This article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this article are for illustrative purposes only.
Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
Source: S&P500. The S&P500 Index (“Index”) is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.
Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.
Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.
Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018 and is authorised by the Central Bank of Ireland. Through its MiFID passport, it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions ("FinIA"). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. It is the intention to ask for the authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co.
Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 and a Type 2 licence from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 can be contacted at Room 3009-3010, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong. Telephone +852 3756 5700.
Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.
Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.
This material is provided on the basis that you are a wholesale client as defined within s761G of the Corporations Act 2001 (Cth). Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth). It is exempt from the requirement to hold an Australian Financial Services License under the Corporations Act 2001 (Cth) in respect of these financial services provided to Australian wholesale clients. Baillie Gifford Overseas Limited is authorised and regulated by the Financial Conduct Authority under UK laws which differ from those applicable in Australia.
Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.
Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.
The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission. Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.
Baillie Gifford Overseas Limited (“BGO”) neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently, BGO is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. No authorization, licence or approval has been received from the Capital Market Authority of Oman or any other regulatory authority in Oman, to provide such advice or service within Oman. BGO does not solicit business in Oman and does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. The recipient of this document represents that it is a financial institution or a sophisticated investor (as described in Article 139 of the Executive Regulations of the Capital Market Law) and that its officers/employees have such experience in business and financial matters that they are capable of evaluating the merits and risks of investments.
This strategy is only being offered to a limited number of investors who are willing and able to conduct an independent investigation of the risks involved. This does not constitute an offer to the public and is for the use only of the named addressee and should not be given or shown to any other person (other than employees, agents, or consultants in connection with the addressee’s consideration thereof). Baillie Gifford Overseas Limited has not been and will not be registered with Qatar Central Bank or under any laws of the State of Qatar. No transactions will be concluded in your jurisdiction and any inquiries regarding the strategy should be made to Baillie Gifford.
Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755-1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This document is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.
50305 PRO WE 0185
Chris Davies Investment Manager
Chris joined Baillie Gifford in 2012 and is an Investment Manager in the Europe Team. He graduated BA (Hons) in Music from the University of Oxford in 2009 and went on to gain an MMus in Music Performance from the Royal Welsh School of Music and Drama in 2010 and an MSc in Music, Mind and Brain from Goldsmiths College in 2011.
YOU MAY ALSO LIKEInsights.Visit Baillie Gifford's Insights page.Tomorrow’s Income Aristocrats.Income investing has been shaken by the coronavirus, but how will this affect the dividend payers of the future? Baillie Gifford investment manager James Dow gives us a glimpse of the potential star performers of tomorrow.Management Metamorphosis.Almost unnoticed, Japanese management is changing for the better. Head of Japan Donald Farquharson looks at the transformation drawing on the experience of three decades of engagement.Back to the Future.Has the pandemic ushered in a return of mid-20th century economics? With unprecedented stimulus replacing austerity, David McIntyre argues that monetary policy has given way to fiscal policy, creating new opportunities for multi asset portfolios.